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December 17, 2004

Anomalies
by John Mackenzie

Gold will always do as it wants, irrespective of opinions, cycles, wants, wishes and needs. Its value is intrinsic, its price based upon uncertainty, the fear of what may lay ahead. Optimism has been throttled, despair will be rewarded. The former has ruled the lay of the land for more than two decades. Yes, there have been "incidents" along the way, but by and large… Optimism has been the "Key" driver throughout this entire Bull Market.

Such is the Bi-Polar nature of Gold and humanity.

Today's herd, for the most part, does not remember the prior Bull Market in Gold. Since 1982 they have experienced the greatest Bull Market in equities of all time, this nearly unending Bull is getting very long on tooth, yet it still has further to run.

Or as one astute reader put it:
"Further to run in nominal terms, but the party is definitely over in gold terms - the ultimate currency. Persistent, intentional currency devaluation has a nasty habit of window-dressing stock indices of the host currency. The following chart removes that window dressing. This chart suggests that over the long-term once the DJIAGOLD ratio reaches the upper channel, a test of lower channel is likely."

Thank you Eric, your insights are appreciated.

The structure of Gold's herd is changing, precious metals and gold shares are moving into firm, unyielding hands. This is an exceptional event for those with the patience and foresight to recognize the scope and scale of this unfolding Bull Market.

The extreme measures of bearishness have skewed so heavily in favor of this deflation scare, it is remarkable. This cause/effect matrix has its root in "speculative expectations" management. Confusion and delay are the order of the day and continue to reign supreme.

An astute reader identified Rydex PM Interest has collapsed, this tends to act as a pivotal event for the next move higher and in fact it is an exceptional warning sign.

Tax loss sales have been and continue to be immense, there are plenty of funds selling "losers" and pressing their bets in the "gainers" column. The Precious Metals sector has been down and on the way out since December of 2003.

Since October 10, 2002, the unexpected has served to provide insight into the general contrarian consensus that higher prices would be very bad for the Equities Markets... At some point on the curve, this will certainly prove true. Unfortunately, assuming so has proved to be a study in abject failure.

Nearly "everything" has surged in our interconnected and Global Bubble

Economy.

Currently, I am observing the potential for the Dow Jones Index to attack the 52 week high @ 10.794.95. The "contrarian characters" will no doubt be shorting as they'll perceive a "double top" on a 52 week trailing basis.

I do not believe we will pause there for anything other than a dull reprieve in the grind higher.

11, 300 - 11,400 should serve as a resting point before an explosive move to 12,400 - 12,800 unfolds. A reader friend and I have been comparing notes of late. Jim's target analysis puts the Dow squarely @ 12,770. Over the years I have had the pleasure of meeting many Elliot Wave disciples; Jim stands out as a strict, disciplined technician. A no-nonsense individual, his analysis overlays exceptionally well with mine. The approach and observations we have taken are exceptionally congruent.

One of the more telling ratios of late has been the $HUI / CRB:

What thousand words does this picture suggest?

Namely this: Our stock in trade, the Dollar, is going to come under immense pressure as the "things we need" are by in large, imported. We became a net importer of food this week past, a pivotal and very important event. As dismal as the above may appear, there is no end in sight to the wanton disregard for speculative excess. At some point in the very real and very near future the "things we need" will begin to experience sudden and dramatic "price" increases. The real and very negative rate environment is exceptionally bullish for Gold. Gold has lagged Base Metals and Crude Oil. I do not believe Crude Oil is about to plunge, but instead reverse off this most recent level of support and surge higher, $64.00 appears to be in sight, then likely, far higher. Import prices - Already shows signs of accelerating.

The CRB/Gold ratio is as telling.

Our Government is not about to halt its blatant disregard for Deficits, Dollars and Dislocations. The Federal Reserve has backstopped every serious threat to "Market Dislocations" and although our trading partners, rich in Dollar Reserves appear to be willing to continue selling our Paper Promises, for now, the Fed appears equally as willing to monetize the returning Paper Promises.

The Flow of Funds data reveal that the Rest of the World, particularly the official sector, and Monetary Authorities accounted for 133% of the flows into Treasury securities.

Yes, the consumer is tapped out and yes, the volatility is sending clear warning signs, but the Amex Homebuilding index and MS REIT have yet to roll over, suggesting more credit consumption dead ahead.

But consider this; our present environment is an "all or nothing" proposition. So I stand ready to accept and expect the unexpected.

Keep the faith and use any/all opportunities to add to your physical positions. This next bull market is going to shock the vast majority of the gold community and public at large.

John Mackenzie

John Mackenzie manages private capital - Email: m2jrmfl@bellsouth.net

Copyright © 2004-2005 John Mackenzie

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